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INVESTMENT  BANKERS  A$...., 
OF  AMERICA  AND  ASSOCIATION  OF 
STOCK  EXCHANGE  FIRMS 


THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 

GIFT  OB 
©m  U.C   V'-'-y 


LIBRARY  OF 

Mer^i^  Trust  Coinpany  of  California 


The  Stock  Exchange 
Business 

A  Course  of  Study  with 
References 

LIBRARY  OF 

Bl^^^fSf]  TniSi  Coi?:>fi2y  cf  California 


New  York 

Doubleday,  Page  &  Company 

for 

Investment  Bankers  Association' 
of  America 

and 

Association  of  Stock  Exchange  Firms 

1918 


^3x.l-   -i-v^  •^•) 


Copyright,  igi8,  by 

Investment  Bankers  Association  of  America 

and 

Association  op  Stock  Exchange  Firms 

All  rights  reserved,  including  thai  of 

translation  into  foreign  languages, 

including  the  Scaiulinavian 


hL\ 


4' 

INVESTMENT  BANKERS  ASSOCIATION        ~    ^' 
OF  AMERICA 

Education    Committee 
Lawrence  Chamberlain,  Chairman 

E.  W.  Bulkley 

Preparation  of  material  by 
S.  S.  Huebner,  Ph.  D. 

Professor  of  Insurance'and  Commerce,  Wharton  School, 

University  of  Pennsylvania;   Lecturer  on  Insurance 

at   Columbia   University;   Lecturer   on   Stock 

Brokerage,  New  York  University  School 

of  Commerce,  Wall  Street  Division. 


Neither  the  Investment  Bankers 
Association  of  America  nor  its 
Education  Committee  assumes 
responsibility  for  any  statements 
made  in  these  outhnes  or  in  any 
books  referred  to  in  the  outlines. 
The  books  were  selected  with  re- 
gard to  their  general  availability 
and  without  prejudice  to  any 
other  books  treating  of  the  same 
subjects. 


Full  titles  of  books  referred  to  will  be  found  in  the  Bibliography 
at  the  end  of  the  book. 


c:**j*j*7>A  o 


DIVISION  I 
FUNCTIONS  OF  EXCHANGE  MARKETS 


TOPIC  I 

ECONOMIC  FUNCTIONS  OF  ORGAN- 
IZED EXCHANGE  MARKETS 

Functions  of  a  broad  continuous  market.    Briefly 
outlined  these  services  are : — 

Huebner,  7,  8-9. 
Van  Antwerpy  17-23. 
Emery  y  156-^8. 

(1)  Mobility  given  to  property. 

(2)  Constitutes  the  chief  reliance  of  credi- 
tors for  prompt  liquidation  of  collateral.  Ex- 
change quotations  are  used  by  banks  everywhere 
as  a  basis  for  collateral  loans.  Exchange  quo- 
tations also  constitute  evidence  of  value,  the 
courts  of  justice  measuring  damages  on  the 
basis  of  these  quotations. 

(3)  Constitutes  the  reliance  of  owners  of 
securities  for  prompt  conversion  of  their  hold- 
ings into  cash,  thus  enabhng  the  prompt  limit- 
ing of  losses,  if  desirable. 

(4)  Makes  the  use  of  stop  orders  feasible. 

(5)  Makes  possible  the  convenient  trans- 
action of  business  by  odd-lot  brokers  for  the 
best  advantage  of  small  investors. 

[3] 


(6)  Gives  constant  quotations  for  the 
benefit  of  security  owners  and  creditors. 

(7)  Furnishes  a  ready  market  for  privileged 
subscriptions  by  making  arbitraging  in  "rights" 
possible. 

(8)  Makes  arbitraging  between  different 
markets,  and  all  the  advantages  resulting  from 
this  practice,  possible. 

(9)  Enables  arbitraging  in  convertible  se- 
curities. 

Exchanges  are  clearing  houses  of  current  news. 

Huehner,  8-g. 

Van  Antwerpy  41-42. 

Emery,  loi-io^,  loy-ioSy 

115-118. 

Quoted  prices  and  actual  values  are  harmonized, 
and  defenseless  security  holders  are  protected 
against  false  or  concealed  news. 

Van  Antzverpy  4-16. 

Values  are  standardized  and  the  flow  of  capital 
is  directed  from  unprofitable  to  profitable  channels. 

Huebner,  11-13. 

Van  Antzverpy  17-20,  26- 

32.  43- 
Emeryy  143-56. 

Favorable  influence  exerted  upon  the  money 
market. 

Huebnefy  ly-iS. 

[4] 


Exchange  markets  discount  future  business  con- 
ditions. 

Huebnefy  13-17- 

Van  Antwerp^  22-24.,  46- 

49. 

Emery,  115-118. 

Functions  of  short-selling.    Briefly   summarized 

these  services  are: — 

Huehner,  15-17. 
Van  Antwerp,  71-95- 

(i)  Stabilizing  effect  upon  the  market. 

(2)  Discounting  function. 

(3)  Resisting  power  to  excessive  inflation. 

(4)  Supporting  power  against  unwarranted 
declines  in  the  market. 

(5)  Sellers  of  securities,  unable  to  deliver 
at  once,  may  borrow  for  delivery  purposes. 

(6)  Hedging  dangerous  market  positions. 

(7)  Operations    of   odd-lot    dealers    made 
possible. 

(8)  Operations  of  specialists  in  the  market 
made  possible. 

(9)  Arbitraging    between    markets    made 
possible. 

(10)  Arbitraging  in  rights. 

(11)  Enables  selling  of  ''rights"  before  new 
securities  are  issued. 

(12)  Enables  arbitraging  in  convertible  se- 
curities. 

[5] 


(13)  Continuous   character  of  the  market 
greatly  increased. 

(With  reference  to  this  topic  see  Chapters 
on  "Discounting  Function  of  Exchange  Mar- 
kets'* and  *'The  Functions  of  Short-seUing'*. 
Huebner:  *'The  Stock  Market".) 


[6] 


TOPIC  II 

REGULATION  OF  BROKERAGE  TRANS- 
ACTIONS AND  THE  CONDUCT 
OF  BROKERS 

Economic  service  resulting  from  the  safeguards 
which  an  organized  exchange  market  gives  in  regu- 
lating brokerage  transactions  and  maintaining  a 
standard  of  commercial  honor  among  brokers  and 
dealers  much  higher  than  would  otherwise  exist. 

Huehner^  g-ii. 

Regulation   of   the   personnel   constituting   the 

market: 

Obligation  of  members  to   abide  by  the 
constitution  and   all  subsequent   amendments 

thereto. 

Constitution  of  the  New 
York  Stock  Exchange,  Ar- 
ticle XIII y  Section  5. 

Admission  requirements  and  method  of  re- 
instatement. 

Constitution  of  the  New 
York  Stock  Exchange,  Ar- 
ticle XV,  Section  2.  Article 
XVI,  Sections  4,  S^  6. 

[7] 


Regulation  of  partnerships  and  branch 
offices. 

Constitution  of  the  New 
York  Stock  Exchange,  Ar- 
tide  XXXV. 

Prohibition  of  certain  kinds  of  fraud  or  undesir- 
able practices: 

Fictitious  transactions — -"wash  sales"  and 
"matched  orders." 

Constitution  of  the  New 
York  Stock  Exchange,  pp. 
SO,  q6. 

*' Bucketing"  of  orders. 

Constitution  of  the  New 
York  Stock  Exchange,  p. 
82. 

Buying  or  selling  by  broker  of  the  securities 
for  which  he  has  accepted  an  order,  for  his  own 
account,  for  that  of  a  partner,  or  for  any  ac- 
count in  which  he  has  an  interest. 

Constitution  of  the  Nezv 
York  Stock  Exchange,  p. 
81. 

Securities  for  which  brokers  have  both  orders  to 
buy  and  sell  must  first  be  offered  at  one-eighth  per 
cent  higher  than  their  bid  before  making  transac- 
tions with  themselves. 

Constitution  of  the  New 
York  Stock  Exchange,  p. 
78. 

[8] 


Improper  use  of  a  customer's  securities  by  a 

member  or  his  firm. 

Constitution  of  the  New 
York   Stock   Exchange y  p, 

97- 

Brokers  must  keep  complete  accounts,  subject  at 
all  times  to  examination  by  the  proper  committee, 
and  which  may  not  be  destroyed  or  refused  for  sub- 
mission. 

Constitution  of  the  New 
York  Stock  Exchange,  pp. 

Publication  of  advertisements  of  other  than  a 
strictly  legitimate  business  character  forbidden. 

Constitution  of  the  New 
York  Stock  Exchange,  p. 
76 

Acceptance  or  carrying  of  an  account  without 
proper  or  adequate  margin. 

Constitution  of  the  New 
York   Stock  Exchange,  p. 

97- 
Reckless  or  unbusinesslike  dealing. 

Constitution  of  the  New 
York   Stock   Exchange,   p. 

97- 

Adoption  and  significance  of  general  rules  which 
may  be  extended  to  cover  every  practice  regarded 

[9I 


as  contrary  to  just  and  equitable  dealing.  As  events 
justify,  various  acts  or  omissions  are  from  time  to 
time  declared  to  come  within  the  scope  of  one  or  the 
other  of  the  following: 

Hearings  on  S.  sSg^y  6jd 
Congress,  Second  Session, 
723-3O' 

Expulsion  when  members  are  adjudged 
"guilty  of  fraud  or  of  fraudulent  acts". 

Constitution  of  the  New 
York  Stock  Exchange,  Ar- 
ticle XVII,  Section  2. 

Suspension  or  expulsion  for  "conduct  or 
proceedings  inconsistent  with  just  and  equitable 
principles  of  trade". 

Constitution  of  the  New 
York  Stock  Exchange,  Ar- 
ticle XVII,  Section  6. 

Suspension  for  acts  "which  may  be  deter- 
mined by  the  Governing  Committee  of  the 
Exchange  to  be  detrimental  to  the  interest  or 
welfare  of  the  exchange". 

Constitution  of  the  New 
York  Stock  Exchange,  Ar- 
ticle XVII,  Section  8. 

Establishment  of  a  Committee  on  Business 
Conduct  charged  with  the  duty  of  "considering 
matters  relating  to  the  business  conduct  of 
members  with  respect  to  customers'  accounts," 

[10] 


and  of  keeping  "in  touch  with  the  course  of 
prices  of  securities  Hsted  on  the  exchange,  with 
a  view  to  determining  when  improper  transac- 
tions are  being  resorted  to." 

Constitution  of  the  New 
York  Stock  Exchangey  Ar^ 
tide  Xly  Section  4. 

Regulation  of  brokerage  transactions  as  regards: 

Acceptance  of  smaller  offerings  when  offer- 
ing to  buy  or  sell  more  than  one  hundred  shares. 

Constitution  of  the  New 
York  Stock  Exchange^  pp. 
78-81. 

Arbitration  of  disputes  arising  between 
members,  and  if  non-members  are  willing,  be- 
tween members  and  their  customers. 

Constitution  of  the  New 
York  Stock  Exchange^  Ar- 
ticle XI y  Section  j. 

Regulation  of  bids  and  offers. 

Constitution  of  the  New 
York  Stock  Exchangey  Ar- 
ticle XXIII . 

Comparison  of  orders  and  liability  on  con- 
tracts. 

Constitution  of  the  New 
York  Stock  Exchangey  Ar- 
tide  XXIV. 

[II] 


Payment  for  and  delivery  of  securities — 
settlement  of  contracts. 

Constitution  of  the  New 
York  Stock  Exchange,  Ar- 
ticles XXV,  XXVI,  13 
XXVIL 

Closing  of  contracts  "under  the  rule". 

Constitution  of  the  New 
York  Stock  Exchange,  Ar- 
ticle XXVIII. 

Deposits  on  contracts. 

Constitution  of  the  New 
York  Stock  Exchange,  Ar- 
ticle XXXI. 

Dividends,  interest,  or  premiums. 

Constitution  of  the  New 
York  Stock  Exchange,  Ar- 
ticle XXXII. 

Transfer  and  registry. 

Constitution  of  the  New 
York  Stock  Exchange,  Ar- 
ticle XXXIII. 

Commissions  to  be  charged. 

Constitution  of  the  New 
York  Stock  Exchange,  Ar- 
ticle XXXIV,  and  pp.  86, 

Suspension  and  re-instatement  of  insolvent 

Constitution  of  the  New 
York  Stock  Exchange,  Ar- 
ticle XVI. 

[12] 


TOPIC  III 
NATURE  AND  FUNCTIONS  OF  OPTIONS 

A  knowledge  of  the  nature  and  uses  of  "op- 
tions" or  "privileges"  is  necessary  to  a  full 
understanding  of  the  functions  of  organized  ex- 
change markets.  Too  frequently  such  contracts 
are  used  for  unnecessary,  or  even  illegitimate 
purposes.  Yet  such  misuse  of  options  should 
not  cause  us  to  overlook  their  true  economic  and 
insurance  functions.  While  not  recognized  by 
the  New  York  Stock  Exchange,  unlike  the  Lon- 
don and  Paris  Exchanges,  stock  exchange  firms 
may  deal  in  privileges,  and  some  have  from  time 
to  time  issued  special  circulars  describing  their 
nature  and  functions. 

(In  addition  to  the  following  bibliography, 
reference  should  be  made  to  Leonard  R.  Hig- 
gin's  work  on  "The  Put-and-Call",  London, 
Effingham  Wilson,  Royal  Exchange,  1906.  This 
book  treats  of  the  London  practice  pertaining 
to  options,  is  highly  scientific  in  its  nature,  and 
is  devoted  largely  to  a  discussion  of  the  math- 
ematical phases  of  the  subject.) 

Definition  of  various  kinds  of  options,  and  con- 
tract  forms  used.         ^^,^^^^  ^^_^^^  ^^_^^^  ^^.^^_ 

[13] 


Status  on  the  New  York  Stock  Exchange. 

Constitution  of  the  New 
York  Stock  Exchange^  Ar- 
ticle XXIII,  Sec.  g. 

American  and  London  Options  contrasted 

Huehner  {Chapter  on 
"  Privileges  and  their  Func- 
tions" in  "  The  Stock  Mar- 
ket"), 

Services  rendered  by: 

Limiting  losses  on  market  commitments 
while  leaving  open  the  possibility  of  increased 
profits. 

Insuring  accumulated  profits. 

Insuring  dealers  who  make  numerous  trades 
and  wish  frequently  to  change  their  position  in 

the  market. 

Huehner  {Chapter  on  Priv- 
ileges and  Their  Functions, 
"The  Stock  Market"). 

Unnecessary  or  illegitimate  uses  of  privileges: 

Operating  in  stocks  without  actually  buy- 
ing or  selling  the  same. 

Misleading  market  opinion  by  manipulators 
attempting  to  accumulate  or  distribute  certain 
lines  of  stocks. 

Facilitating  the  operation  of  a  corner. 

Trading  in  options  themselves. 

Facilitating  advertising  and  selling  cam- 
paigns. 

[14I 


Betting  purposes. 

Nelson,  22-2g. 
Huehner  {Chapter  on  Priv- 
ileges and  Their  Functions, 
''The  Stock  Market"). 

Considerations  determining  the  value  of  options. 

Nelsony  14-17,  30-43. 
Legal  principles  governing. 

Dos   PassoSy   /,   404-406, 

601-14. 

Question  i.  Define:  "call",  "put",  "strad- 
dle", or  "spread". 

Question  2.  If,  after  the  option  has  been  sold, 
the  seller  feels  that  he  ought  to  protect 
himself,  show  fully  how  the  seller  of  the 
option  may  limit  his  risk. 

Question  3.  Explain  all  the  differences  between 
London  and  American  options.  In  this 
connection  explain  the  application  of  the 
interest  allowance  in  the  case  of  London 
options. 

Question  4.  What  are  the  considerations  which 
suggest  the  figure,  let  us  say  of  5>^,  as  a 
safe  premium  for  the  risk  incurred  in  sell- 
ing a  "put"  or  "call"  on  Union  Pacific 
for  a  period  of  three  months  ?  Why  should 
the  quotation  for  the  same  stock  be  higher 
if  the  period  covered  is  greater? 

Question  5.  Explain  the  several  ways  in  which 
options  may  serve  the  purpose  of  insurance. 

Question  6.  What  is  the  legal  status  of  options, 
and  explain  the  reasoning  of  the  courts. 

[15] 


TOPIC  IV 

NATURE   AND   FUNCTIONS   OF  ARBI- 

TRAGING 

Description  of  New  York-London  arbitraging. 

Nelson,  51-59- 

Stock  Exchange  Regulations  concerning. 

Constitution  of  the  New 
York  Stock  Exchange,  y6- 
78. 

How  shipment  of  securities  is  avoided. 

Nelso7i,  54-55. 
Huehner,  20. 

Method  of,  and  expenses  connected  with  the 
shipment  of  stocks  between  London  and  New  York. 

Nelson,  67-72. 

Conversion  of  London  into  New  York  prices. 

Nelson,  78-87. 

Services  rendered  by: 

Facilitates  the  cancellation  of  international 
debts. 

[16] 


Brings  prices  of  securities  to  a  common 
level  in  all  the  leading  stock  markets  of  the 
world. 

Huehnefy  ig-20. 

Arbitraging  in  privileged  subscriptions  or  "rights" 
(Also  see  Topic  XVI.) 

Nelson,  60-63. 

Question  i.  A  certain  stock  was  purchased  in 
London  at  245  and  shipped  to  New  York. 
Ascertain  the  cost  of  the  stock  in  New 
York,  assuming  the  cost  of  a  cable  transfer 
to  be  ^4.87.  Explain  how  the  arbitrageur 
manages  to  eliminate  as  much  as  possible 
the  shipment  of  securities  from  one  mar- 
ket to  the  other. 

Question  2.  With  exchange  at  ^4.863^,  convert 
a  London  price  of  186  into  its  New  York 
equivalent,  and  explain  the  reason  why  you 
follow  the  method  used. 

Question  3.  The  Canadian  Pacific  Railroad 
Company  issued  new  stock  to  its  stock- 
holders at  $150  a  share  to  the  extent  of 
ten  per  cent  of  their  holdings.  With  the 
old  stock  quoted  at  ^240  a  share,  the  math- 
ematical value  of  the  "rights"  would  be 
8X.  Explain  fully  how  an  arbitrageur 
would  effect  an  arbitrage  transaction  be- 
tween the  "rights"  and  the  stock. 


I17] 


DIVISION  II 

ORGANIZATION  AND   OPERATION  OF 
THE  MARKET 


TOPIC  V 

LEGAL  STATUS  AND  ORGANIZATION  OF 
STOCK  EXCHANGES 

The  general  legal  nature  of  stock  exchanges. 
Unlike  produce  exchanges,  American  stock  ex- 
changes are  private,  voluntary,  unincorporated  as- 
sociations. ^^^  p^^^^^  j^  ^^.^^^ 

Emery,  13-17- 

Stock  exchanges  are  unlike  partnerships,  cor- 
porations or  incorporated  joint-stock  associations. 

Dos  Passos  I,  28-32. 

Members*  rights  in  the  property  holdings  of  non- 
incorporated  stock  exchanges. 

Dos  Passos  /,  32-40. 

Law  governing  suits  against  stock  exchanges. 

Dos  Passos  /,  40-36. 

Legal  interpretation  of  the  powers  of  exchanges 
to  suspend  and  expel  members. 

Dos  Passos  ly  72-112. 

[21] 


Property  rights  of  stock  exchanges  in  quotations, 
representing  their  floor  transactions,  and  their  right 
to  control  the  publication  and  distribution  of  the 

same. 

Dos  Passos  /,  22-28. 
Commercial  Telegram  Co, 
vs.  Smith,  4J  Hun.  494. 

Legal  nature  of  a  stock  exchange  seat. 

Dos  Passos  /,  144-164. 
Emery,  22. 

Preferred  rights  of  exchange  members  to  the 
proceeds  of  defaulting  members'  seats. 

Several  times  provisions  in  the  constitution 
of  a  stock  exchange  providing  for  the  distribu- 
tion of  the  proceeds  of  a  seat  in  a  definite  order 
of  priority,  favorable  to  members  as  compared 
with  outside  creditors,  have  been  upheld  by 
the  courts. 

Constitution    of   the    New 
York  Stock  Exchange,  Ar- 
ticle XV,  Sec.  J. 
Dos  Passos  I,  113-28. 
Hyde  vs.  Wood,  94  U.  S. 

523- 
The  government  of  stock  exchanges — powers  and 
duties  of  various  officers  and  standing  committees, 
and  qualifications  for  admission  to  membership. 

Constitution  of  the  New 
York  Stock  Exchange,  Ar- 
ticles II  to  XIII,  inclusive. 

[22] 


Comparison  of  American  stock  exchanges  with 
leading  foreign  exchanges. 

Emeryy  Chapter  2,  Part  I. 
Van    Antzuerpy     Chapters 

VidaU  ^'History  and  Meth- 
ods of  the  Paris  Bourse''. 
Koch,  "German  Stock  Ex- 
change Regulation'. 


[23] 


TOPIC  VI 

CLASSIFICATION  AND  DESCRIPTION  OF 
VARIOUS  CLASSES  OF  STOCKS 

Nature  of  stocks  as  contrasted  with  bonds. 

Chamberlain,  2Q-^y,   488- 
go. 

ClassiiScation  with  reference  to  par  value. 

Adams,  43-45- 
Lyon  /,  84. 

Classification  with  reference  to  issue: 
Authorized  and  unissued  stock. 

Adams,  45. 
Lyon  I,  log. 

Treasury  Stock. 

Adams,  45-46- 
Lyon  II,  g-i2. 

Assessable  stock. 

Adams,  46. 

Common  stock  and  the  rights  pertaining  thereto. 

Adams,  46-48. 

[h] 


Preferred  stock  classified  according  to: 

Dividends — "cumulative"  or  "non-cumula- 
tive"; special  dividend  funds;  first,  second, 
etc.,  preferred  stock. 

Adamsy  49-50,  52-53. 

Assets  on  dissolution  of  the  corporation. 

Adams,  50-51. 

Voting  power — exclusive  or  special. 

Adams,  51-52. 
Lyon  /,  22-28. 

Callable  feature. 

Adams,  53-55. 
Lyon  I,  25-28. 

Convertible  feature. 

Adams,  55-56,  57-58. 
Lyon  I,  20-21. 

Participation  in  earnings  over  and  above 
stipulated  dividend. 

Adams,  56-57. 
Lyon  I,  17-20. 
Deferred  Stock. 

Adams,  48-49. 

Guaranteed  stock  and  various  conditions  of  the 
guarantee. 

Adams,  5g-6o. 

Debenture  stock. 

Adams,  61. 

[25] 


TOPIC  VII 
QUOTATION  SERVICE  OF  EXCHANGES 

Manner  of  collecting  and  disseminating  quota- 
tions. Pratt,  182-83. 

Nature  and  interpretation  of  the  abbreviations 
used  in  recording  quotations  on  the  tape. 

Pratt,  184-88. 

The  ticker  as  a  timekeeper  for  the  street. 

Pratty  188. 

Exchange  safeguards  preventing  misuse  of  the 
ticker  service.  p^^tt,  183,  189. 

Non-ofRcial  character  of  quotations  recorded  by 
the  stock  exchange,      p^-^tt,  i8g. 

The  right  of  stock  exchanges  to  own  and  to  con- 
trol the  publication  and  distribution  of  quotations 
representing  their  floor  transactions. 

Dos  Passos  /,  22-28. 
Commercial  Telegram  Co. 
vs.  Smithy  47  Hun.  4Q4. 

Importance  to  the  market  of  other  methods  of 
wire  communication  and  of  news  agencies. 

Pratty  i8g-gy. 
[26] 


TOPIC  VIII 
LISTING  OF  SECURITIES 

It  is  one  of  the  primary  purposes  of  the 
stock  exchange  to  see  that  the  interests  of  the 
pubhc  are  properly  safeguarded  as  regards  the 
issuance  and  marketing  of  securities.  To  this 
end  Hsting  of  securities  constitutes  one  of  the 
essential  elements  of  an  organized  security  mar- 
ket. By  this  practice  corporations,  before  their 
stocks  or  bonds  can  be  dealt  in  on  the  floor  of 
an  exchange,  must  comply  with  certain  stand- 
ards of  legality,  security  and  workmanship. 

Stock  exchange  regulations  concerning  the  Stock 
List  Committee  and  its  powers  and  duties. 

Constitution  of  the  New 
York  Stock  Exchange,  Ar- 
ticle XI,  Section  12;  Ar- 
ticle XXXIII,  Sections  2, 

3^  4- 
Listing  is  not  a  guarantee  of  value  and  does  not 
imply  the  Exchange's  recommendation  of  the  se- 
curity for  favorable  consideration  by  investors  and 
speculators.  Pratt,  125-27. 

Chamberlain,  62-6 J. 

[27] 


Listing  requirements  of  the  New  York  Stock  Ex- 
change concerning: 

Organization  of  the  corporation   and  the 
nature  of  its  securities. 

Hearings  on  S.  sSg^y  6jd 
Cong.,      Second     Session, 

739-41- 

Description  of  the  property. 

Hearings  on  S.  J^P5,  739- 
41. 

Engraving  of  certificates. 

Hearings  on  S.  38g3,  744.- 

45- 
Regulation  of  the  printed  text  of  certifi- 

^^^^^*  '  Hearings  on  S.  3893^  739~ 

40. 

Transfer  and  Registry. 

Hearings  on  S.  3895,  744. 

Papers  to  be  filed  with  the  application  for 
listing.  Hearings  on  S.  3895,  742. 

Agreements  with  the  Exchange  which  cor- 
porations must  observe. 

Hearings  on  S.  3893,  742- 

43- 

Pratt,  130-31. 

Listing  of  securities   of  reorganized   cor- 
porations. Hearings  on  S.  3895,  741- 

[28] 


Listing  of  additional  amounts  of  securities 
already  listed.  Hearings  on  S.  389S,  742. 

Suspension  or  removal  of  securities  from  the  list. 

Hearings  on  S.  jSg^,  210- 
i6y  743- 

The  process  of  listing  explained. 

Hearings  on  S.  jSg^,  igg- 
200^  20$. 

Advantages  of  listing: 

Reasonable  assurance  of  legality  of  issue, 
proper  text  of  the  security,  and  safeguards 
against  counterfeiting. 

Hearings  on  S.  5<?P5,  203- 

04. 

Greater  publicity  to  the  public. 

Hearings  on  S.  sSg^,  201- 

02. 

Pratt,  127-28. 

Greater  convertibility. 

Chamberlain,  63-64. 

Greater  hypothecary  value. 

Chamberlain,  63-66. 

Corporations  must  observe  certain  agree- 
ments with  the  Stock  Exchange. 

Hearings  on  S.  jSgj,  742- 

43- 

Pratt,  130-31. 

[29] 


Advertises  and  popularizes  the  stock. 

Hearings  on  S.  sSg^y  206. 

Traders  protected  against  a  too  restricted 
volume  of  outstanding  stock. 

Van  Antwerp,  167-68. 

London  Exchange,  without  further  examination, 
lists  any  security  listed  on  the  New  York  Exchange. 

Hearings  on  S.  sSgs,  202. 

(With  reference  to  this  Topic  also  see 
Chapter  on  ''Listing  of  Securities",  Huebner: 
"The  Stock  Market".) 


[30] 


TOPIC  IX 

CLASSES  OF  DEALERS  AND  BROKERS 
COMPOSING  THE  MARKET 

Commission  Brokers. 

Van  Jntzverp,  27S. 

"Floor"  or  "room"  traders. 

Van  Antwerp^  284-85. 


Odd-lot  dealers. 


Specialists. 
Arbitrageurs. 


Van  Antwerp,  281-82. 
Hearings  on  S.  38Q5,  d^d 
Congressy  Second  Session, 
160-178. 


Van  Antwerp,  278-80,  283. 

Van  Antwerp,  283-84. 

"Floor"  or  "Two-dollar"  brokers. 

Van  Antwerp,  280-81. 

American  system  compared  with  the  "jobbing" 
system  of  London.         ^^„  Antwerp,  277-78, 335- 

42,372-74. 

Withers,    Chapters     VIII 
and  IX. 

(With  reference  to  this  topic  also  see 
Chapter  on  "Types  of  Dealers  and  Brokers  and 
their  Work".    Huebner:  **The  Stock  Market".) 

[31] 


TOPIC  X 

TYPES  OF  OFFERS  AND  ORDERS  AND 
THEIR  INTERPRETATION 

General  rules  and  customs  of  the  Stock  Exchange 
governing  the  purchase  and  sale  of  securities. 

Norton^  25. 

Offers  classified  according  to  time  of  delivery: 

"Cash". 

"Regular  Way". 

"At  three  (or  tv^o)  days". 

"Delivery    postponed    longer   than    three 
days  and  not  longer  than  sixty  days". 

"  Delivery  fixed  by  happening  of  some  fu- 
ture event".  ^^^-^^^  XXIII,  New  York 

Stock   Exchange   Constitu- 
tion. 

Article  XXFI,  Section  /, 
New  York  Stock  Exchange 
Constitution. 
Norton,  25-27. 
Dos  Passos  I,  183-85. 

Other  Exchange  regulations  concerning  bids  and 
offers.  ]^g^  York  Stock  Exchange 

Constitution,  pp.  78-81. 

■[32] 


Contracts  are  not  actual  purchases  and  sales,  but 
contracts  to  make  purchases  and  sales. 

Norton,  27-28,  JJ,  40. 

Manner  of  completing  a  purchase  or  sale  for  the 
"mvestment  account". 

Norton,  28-jo. 

Manner  and  legal  effect  of  "taking"  the  order. 

Norton,  34-36. 

Legal  principles  relating  to  the  carrying  out  of  the 

order. 

Norton,  36-38. 

A  tjrpical  order  analyzed  (according  to  law  and 
Exchange  usage)  as  to  the  meaning  of: 

Technical  words  and  abbreviations. 

Norton,  31. 

Dos  Passos  I,  206. 

"Buy"  or  "sell". 

Norton,  31. 

"For  me"  or  "for  my  account". 

Norton,  31. 

"At  my  risk". 

Norton,  31. 

Time  of  delivery  when  not  specified. 

Norton,  31. 

Number  of  shares  broker  may  buy. 

Norton,  32. 

Dos  Passos  I,  208-og. 

[33] 


Price  when  stipulated;  or  when  not  stip- 
ulated in  the  order. 

Norton^  32. 

Dos  Passos  /,  207. 

Duration  and  cancellation. 

Norton^  5<?. 

Dos  Passos  /,  210. 

Actual  and  prompt  execution. 

Norton,  38. 

Dos  Passos  /,  206-07, 

Right  to  execute  anywhere,  if  not  limited. 

Dos  Passos  I,  2og. 

Discretionary  orders. 

Dos  Passos  /,  2ii'i2. 

The  Commission  charged. 

Constitution  of  the  New 
York  Stock  Exchange,  Ar- 
ticle XXXIV,  and  page  86. 
Norton,  jp. 

Notice  to  customer,  and  legal  principles  con- 
cerning. 

Norton,  5p. 

Dos  Passos  I,  212-13. 
Stop  orders. 

Dos  Passos  I,  302-06. 

(With  reference  to  the  aforementioned  sub- 
ject matter  see  Chapter  on  "Types  of  Offers 
and  Orders"  in  Huebner:  "The  Stock  Market ".) 

[34] 


Question  i.  Define  fully  each  of  the  several 
types  of  offers  to  buy  or  sell,  with  reference 
to  the  time  of  delivery.  As  regards  each 
definition,  include  the  particular  time  of 
delivery  specified  by  the  Rules  of  the  New 
York  Stock  Exchange. 

Question  2.  Explain  the  legal  nature  of  the 
contract  (execution  of  an  order)  made  on 
the  floor  of  a  stock  exchange. 

Question  5.  Compare  the  "stop  order"  with 
''options"  as  a  means  of  limiting  losses. 
This  question  involves  a  statement  of  the 
comparative  advantages  and  disadvan- 
tages.    (Also  see  Topic  III.) 

Question  4.  A  customer  gives  his  broker  the 
following  order:  "Buy  for  my  account  and 
risk  300  A.  R.  at  JJ.  This  order  to  remain 
in  force  until  cancelled".  Rewrite  this 
order  so  as  to  fully  express  the  meaning  in 
accordance  with  the  law  and  the  usages  of 
the  Stock  Exchange. 

Question  5.  Explain  fully  the  obligations  of  a 
broker  in  relation  to  the  execution  of  the 
above  mentioned  order. 

Question  6.  Explain  fully  the  obligations  of  the 
customer  to  the  broker  in  relation  to  the 
execution  of  the  above  mentioned  order. 

Question  7.  In  connection  with  the  execution 
of  the  above  mentioned  order,  what  im- 
pHed  rights  (what  authority)  does  the  cus- 
tomer confer  upon  the  broker? 

[35] 


TOPIC  XI 
ANALYSIS  OF  A  MARGIN  TRANSACTION 

For  an  understanding  of  this  topic  the 
reader  is  referred  to  the  majority  and  dissenting 
opinions  in  Markham  vs.  Jaudon,  41  N.  Y.  2^5. 
The  case  is  worthy  of  careful  study,  since  it 
covers  the  topic  and  constitutes  a  text  of  the 
subject  matter.  The  dissenting  opinions  in  the 
case  are  also  instructive,  being  fully  reported 
*'at  the  request  of  many  leading  members  of 
the  profession",  because,  as  the  court  report 
states:  ''numerous  contracts  are  daily  made  in 
the  City  of  New  York,  frequently  involving 
enormous  amounts,  and  also  because  of  the  fact 
that  this  is  the  first  full  consideration  in  the 
court  of  last  resort,  of  the  legal  relation  of  the 
parties  in  such  contracts". 

Respective  rights  and  obligations  of  broker  and 
customer  in  a  speculative  transaction. 

Markham  vs.  Jaudoriy  41 
N.  Y.  239-40. 

Concerning  the  execution  of  the  order,  the  legal 
position  of  the  broker  is  that  of  an  agent. 

Markham  vs.  Jaudon,  240. 

[36I 


The  broker,  when  holding  securities  for  a  cus- 
tomer which  are  only  partially  paid  for,  is  subject  to 
the  law  of  pledgor  and  pledgee.  Hence  before  sell- 
ing these  securities,  the  pledgee  must  give  reason- 
able notice  of  the  time  and  place  of  sale,  and  the 
sale  must  be  effected  at  a  place  of  "public  sale". 

Markham  vs.  Jaudon,  240- 

45- 

Stock  exchanges  are  commonly  held  by  the  courts 
to  be  places  of  "private  sale"  since  they  are  essen- 
tially private,  no  one  being  allowed  to  enter  the 
room  but  members. 

Dos  Passes  I,  357-63. 

Where,  however,  a  customer  is  ''short"  of 
stock  and  the  broker  is  obliged  to  close  the 
transaction  by  buying  in  the  stock,  it  is  neces- 
sary to  construe  a  stock  exchange  to  be  a  place 
of  public  sale,  although  no  special  clause  to  this 
effect  may  have  been  inserted  in  the  broker's 
order. 

Dos  Passos  /,  S57- 

The  legal  effect  of  the  above  principles, 
which  would  tend  to  render  the  carrying  of 
speculative  accounts  impracticable,  may  be 
overcome  by  having  the  order  provide  words 
to  the  effect  that  the  broker  "may,  at  any 
pubHc  or  private  sale,  sell  without  notice,  and 
may  buy  in,  at  any  public  or  stock  board  sale, 
all  stock  purchased  for  me  (the  customer)  when 
all  your  liability  for,  and  all  indebtedness  to 

[37] 


you  of  the  undersigned  shall  not  be  satisfactorily 
secured;  it  being  understood  that  you  (the 
broker)  reserve   the   right   to   determine   such 

^    *  Markham  vs.  Jaudon,  244, 

248-50. 

The  customer's  right  to  control  and  take  up  the 
stock  purchased  on  margin. 

Dos  Passos  /,  275-83. 

The  form  and  manner  of  serving  notice  for  addi- 
tional margin. 

Dos  Passos  /,  536-46. 

The  measure  of  damages  in  case  of  wrongful 
conversion  by  a  broker. 

In  Markham  vs.  Jaudon  the  amount  of 
damage  was  measured  by  "the  highest  market 
price  of  the  property  betM^een  the  time  of  the 
wrongful  conversion  and  the  trial".  But  it  was 
soon  seen  that  the  application  of  this  rule  would 
work  great  hardship  in  many  cases,  and  conse- 
quently a  different  ruHng  was  adopted  as  in  the 
cases  of  Baker  vs.  Drake,  55  N.  Y.  211,  and 
Gallagher  vs.  Jones,  I2g  U.  S.  IQ5.  In  these 
cases  the  true  measure  of  damages  in  stock 
transactions  was  declared  to  be  "the  highest 
intermediate  value  reached  by  the  stock  be- 
tween the  time  of  the  wrongful  act  complained 
of  and  a  reasonable  time  thereafter,  to  be  al- 
lowed to  the  party  injured  to  place  himself  in 
the  position  he  would  have  been  in  had  not  his 
rights  been  violated".     What  constitutes  rea- 

[38] 


sonable  time  depends  upon  the  circumstances 
of  each  case. 

Markham  vs.  JaudoUy  24.5, 

251-52. 

Question  i.  In  the  case  of  a  margin  transaction 
to  what  extent  is  a  broker  an  agent  and  to 
what  extent  is  he  a  pledgee? 

Question  2.  Give  the  reasons  which  caused  the 
New  York  Court  to  apply  the  law  of  pledgor 
and  pledgee  to  the  brokerage  business  in 
speculative  transactions.  Analyze  the  or- 
der to  buy  or  sell  with  special  reference  to 
the  various  clauses  which  are  inserted  for 
the  broker's  protection,  and  in  connection 
with  each  explain  the  reason  for  incorporat- 
ing the  same. 


[39] 


TOPIC  XII 
THE  SHORT  SALE 

Definition  and  General  Nature  of  Short  Selling. 

Norton,  5-8. 

Nature  of  the  loan  of  securities  necessary  to 
conduct  a  short  sale : 

Brokers  deal  together  as  principals. 

Norton,  8-g. 

Call  loan  for  both  borrower  and  lender. 

Norton,  g. 

Complete  title  to  stock  lent  transferred  to 
borrower. 

Norton,  g. 

Market  price  (plus  a  margin  at  times)  de- 
posited by  the  borrower  with  the  lender. 

Norton,  g-ii. 

Borrower  liable  for  dividends  or  accre- 
tions to  the  lender;  and  lender  liable  for  assess- 
ments to  the  borrower. 

Norton,  lo-ii. 

[40I 


Interest  payment  by  lender  to  borrower, 
and  factors  determining  this  interest  rate. 

Norton,  11-12. 

Termination  of  the  loan  transaction. 

Norton y  12-13,  41-48. 

Limitations  upon  broker's  authority  to 
borrow.  ^^^^^^^^  ^^_^^ 

Maintenance  of  the  loan. 

Norton,  32-34. 

The  order  to  sell  short  interpreted  according  to 
law  and  Stock  Exchange  usage. 

Norton,  13-28. 

Dos  Passos  I,  323-34. 

Customer's  margin  protecting  the  broker. 

Norton,  35-41. 

Economic  services  rendered  by  short  selling  in 
the  security  market: 

Discounting  function  of  the  market  facil- 
itated. 

Steadies  prices  at  all  times. 

Resists  excessive  inflation  and  checks  un- 
warranted declines. 

Owners  of  securities,  unable  to  deliver  at 
once,  may  nevertheless  sell  and  borrow  for 
purposes  of  delivery. 

Makes  possible  the  hedging  of  a  dangerous 
market  position. 

[41] 


Operations  of  "odd-lot  dealers"  greatly 
facilitated. 

Operations  of  "Specialists"  greatly  facil- 
itated. 

Arbitraging  between  different  markets 
made  possible. 

Arbitraging  in  "rights"  made  possible. 

Owners  of  "rights"  may  dispose  of  same 
by  selling  short  an  equal  amount  of  old  stock. 

Arbitraging  in  convertible  securities  made 
possible. 

Continuous  character  of  the  security  mar- 
ket greatly  increased. 

Huehner,  15-17. 

Van  Antwerp,  78-82,  420- 

21. 

(With  reference  to  this  topic,  also  see 
Chapter  on  "The  Short  Sale"  in  Huebner: 
"The  Stock  Market".) 

Question  i.  On  March  i,  a  customer  orders  his 
broker  "X"  to  sell  short  for  him  on  the 
New  York  Exchange,  regular  way,  100 
shares  of  a  certain  stock  at  ^75  (par  value 
of  shares  $100),  and  the  order  is  executed 
at  this  figure.  The  customer  agrees  to 
protect  the  broker  with  the  customary 
margin  of  10%,  and  agrees  to  keep  this 
margin  good. 

The  broker  borrows  the  shares  from  an- 
other broker  "A,"  but  on  March  8  "A" 
wants  to  discontinue  the  loan.  During  the 
week  of  March  i  to  March  8,  call  money 

[42] 


in  New  York  rules  at  yA%\  the  stock  also 
rises  gradually  to  86. 

On  March  8,  "X"  borrows  the  stock 
from  broker  "  B  ".  On  March  9  call  money 
rises  to  5%,  and  on  March  10  to  6%,  but 
on  March  11  reacts  to  4%.  On  March  11 
the  stock  sells  ex-dividend  $1  a  share. 
The  stock  in  the  meantime  has  declined 
to  80. 

On  March  14  "B"  asks  for  the  return 
of  the  securities  and  "X"  enters  into  a  loan 
transaction  with  broker  *'C".  Call  money 
is  still  ruHng  at  4%.  On  March  15  an  as- 
sessment of  ^10  per  share  becomes  due 
(the  stock  not  having  been  fully  paid). 

On  March  21  the  stock  has  declined  to 
78,  and  the  broker  closes  the  transaction 
for  his  customer  at  this  price,  the  customer 
having  given  an  order  to  this  effect. 

On  the  basis  of  the  above  facts,  explain 
fully  the  manner  of  operating  this  short 
sale  from  beginning  to  end,  that  is  to  say 
from  the  time  the  customer  gives  the  order 
to  sell  to  the  rendering  of  the  account  to 
the  customer  by  the  broker.  In  your  ex- 
planation, keep  in  mind  the  following 
features,  and  as  regards  each  give  the  rea- 
son for  the  practice  that  prevails: — 

(i)  Nature  of  the  order  so  far  as  the  short 
selling  feature  is  concerned. 

(2)  The  margin  of  the  customer. 

(3)  The  delivery  of  securities  to  the  buyer. 

[43I 


(4)  The  terms  of  the  loan  of  securities. 

(5)  The  assignment  of  the  stock  in  the  loan 
transaction. 

(6)  The  factors  of  interest,  dividends  and 


assessments. 


(7)  The  factors  that  enter  into  the  account 
rendered  by  the  broker  to  the  customer. 


[44] 


TOPIC  XIII 

THE  STOCK  EXCHANGE  CLEArING 
HOUSE  SYSTEM 

Process  of  clearing  stocks  explained: 

Comparison  of  transactions. 

Pratt,  171-73- 
Todma7i,  6g-70. 

Nature  and  use  of  "clearance  sheet". 

Pratt,  173-76. 
Todman,  70-72. 

Use  of  "settlement  price"  for  delivery  or 

receipt  of  balances. 

Pratt,  i68'6g,  173,  177. 
Todman,  72-74. 

Use  of  check  or  draft  in  settling  cash  bal- 
ances. 

Pratt,  173,  176. 

Statements  for  delivery  or  receipt  of  bal- 
ances. 

Pratt,  176. 

Todman,  74-75- 
[45] 


Use  of  "allotment  sheets". 

Pratty  1^6. 

Delivery  of  balances. 

Pratty  176. 

Stock  Exchange  regulations  concerning  clearing: 

Committee    on    Clearing    House    and    its 
powers. 

Constitution  of  the  New 
York  Stock  Exchange^  Ar- 
ticle Xly  Sec.  5;  Article 
XXVII. 

Securities  to  be  cleared. 

Constitution  of  the  New 
York  Stock  Exchange,  Ar- 
ticle XXFII,  Section  5. 

Comparison  of  transactions. 

Constitution  of  the  New 
York  Stock  Exchange,  Ar- 
ticle XXI F. 

Services  rendered  by  the  Stock  Exchange  Clear- 
ing House: 

Certification  of  checks  greatly  reduced. 

Pratty  i6y6y. 

Actual  deliveries  of  shares  greatly  reduced. 

Pratty  i6y. 

Volume  of  checks  greatly  reduced. 

Pratty  164. 

I46I 


Confusion  and  risk  involved  in  actual  de- 
liveries eliminated,      p^^^^^  ^^^ 

Loss  and  time  involved  in  insolvencies 
greatly  reduced.  p^^^^^  ^^^ 

Numerous  transfers  of  shares  avoided. 

Van  Antwerp,  120. 

Desire  for,  and  method  of,  securing  secrecy. 

Pratty  ijg-iSo. 

Legal  principles  underlying  clearing  house  sys- 
tems. /)oj  Passos  /,  406-og. 

Pratt,  163. 

New  York  System  contrasted  with  the  London 
Fortnightly  Settlement  System. 

Withers,  Chapter  IX. 
Van  Antwerp,  365-66, 575- 
76. 

(With  reference  to  this  Topic  see  Chapter 
on  "Stock  Exchange  Clearing  Houses,"  Hueb- 
ner:  "The  Stock  Market".) 

Question  i.  On  a  given  day  broker  "X"  of  the 
New  York  Stock  Exchange  buys  the  fol- 
lowing stocks:  From  broker  "A"  200 
shares  of  American  Smelting  and  Refining 
at  69;  from  broker  "B"  200  New  York 
Central  at  70;  from  broker  *'C"  300  U.  S. 
Steel  common  at  91;  from  broker  *'D"  300 
Union  Pacific  at  121;  and  from  broker 
"E"  200  Southern  Pacific  at  90. 

[47] 


On  the  same  day  broker  "X"  sells  the 
following  stocks :  To  broker  *'  F  "  200  Amer- 
ican Smelting  and  Refining  at  67;  to  broker 
**G"  100  New  York  Central  at  72;  to 
broker  "H"  200  U.  S.  Steel  at  92. 

The  closing  quotations  for  the  day  are: 
American  Smelting  and  Refining  7i>^, 
New  York  Central  71,  U.  S.  Steel  common 
QO^^;  Union  Pacific  118,  and  Southern 
Pacific  88. 

Prepare  broker  **X's"  clearance  sheet, 
which  is  to  be  submitted  to  the  Clearing 
House.  Prove  that  in  the  above  illustra- 
tion broker  *'X"  did  not  lose  or  gain 
through  the  operation  of  the  clearing  house 
system. 

Question  2.  Explain  the  complete  process  of 
clearing  the  above  mentioned  business,  in- 
cluding the  discussion  of  clearance  tickets 
and  allotment  sheets. 

Question  3.  Suppose  that,  in  addition  to  the 
business  referred  to  under  Question  i, 
broker  "X"  had  borrowed  from  broker  "I" 
100  shares  of  U.  S.  Steel  common  and  loaned 
to  broker  "J"  100  Union  Pacific.  Show 
how  broker  "X"  would  clear  these  loan 
transactions,  and  why  this  method  is 
adopted.  Explain  the  advantages  result- 
ing to  the  business  community  from  the 
existence  of  a  stock  exchange  clearing 
house  and  illustrate  each  advantage  with 
the  data  furnished  in  Question  i. 

[48] 


TOPIC  XIV 

ASSIGNMENT  AND  TRANSFER  OF  SE- 
CURITIES 

Stock  Exchange  rules  designed  to  secure  uniform- 
ity of  action  and  to  eliminate  unnecessary  risk,  as 
illustrated  by  the  New  York  Stock  Exchange: 

Constitution  of  the  New 
York  Stock  Exchange,  Ar- 
ticle XX F,  Section  2;  Ar- 
ticle XXXII;  and  Article 
XXXIIIy  Section  i. 
Hearings  on  S.  S^95i  ^3<^ 
Congress,  2d  Session,  744- 

45- 

(i)  Corporations  are  required  to  maintain 
a  transfer  agency  and  registry  office  in  the 
Borough  of  Manhattan,  and  both  transfer  agent 
and  registrar  must  be  acceptable  to  the  Com- 
mittee on  Stock  List.  The  registrar  appointed 
must  file  with  the  secretary  of  the  exchange 
an  agreement  to  comply  with  the  requirements 
of  the  exchange  in  regard  to  registration. 

(2)  The  entire  issue  of  capital  stock  must 
be  transferable  at  the  office  at  New  York.     If 

[49] 


transfers  are  made  in  other  cities,  certificates 
issued  in  such  cities  must  be  interchangeable 
and  identical  in  color  and  form.  No  change  in 
the  form  of  certificate,  the  transfer  agent,  the 
registrar  or  the  trustee  of  bonds  can  be  made 
without  the  approval  of  the  Committee  on 
Stock  List. 

(3)  Thirty  days'  notice  must  be  given  to 
the  Exchange  before  a  corporation  increases  its 
authorized  capital  stock. 

(4)  To  prevent  counterfeiting,  all  bonds, 
coupons,  or  certificates  of  stock  must  be  made 
in  accordance  with  the  regulations  of  the  Ex- 
change. 

(5)  As  regards  the  distinguishing  features 
of  various  classes  of  securities,  each  denomina- 
tion must  be  of  such  distinctive  appearance 
and  color  as  to  make  them  readily  distinguish- 
able from  other  denominations. 

(6)  The  purchaser  is  given  the  option  to 
require  delivery  to  be  either  in  certificates  or 
by  transfer.  In  case,  however,  personal  lia- 
bihty  attaches  to  ownership,  the  seller  is  given 
the  right  to  deliver  by  transfer.  When  the 
transfer  books  are  closed,  the  buyer  cannot 
require  delivery  by  transfer 

(7)  The  blank  form  of  assignment  and 
power-of-attorney  is  prescribed  by  the  ex- 
change; and  to  constitute  a  good  delivery,  the 
assignment  must  conform  with  the  rules  of  the 
Exchange. 

I50I 


Negotiable  securities  dealt  in  on  exchanges. 

Dos  Passos  /,  64.8-56. 

Necessary  elements  of  negotiability. 

Dos  Passos  /,  6^5-^8 . 

Negotiability  of  stock  certificates. 

Dos  Passos  /,  700-725. 

Analysis  of  the  blank  form  of  assignment  and 
power-of-attomey. 

Leading  principles  to  be  observed  in  connection 
with  the  assignment,  transfer  and  registration  of 
various  classes  of  securities. 

Process  of  transferring  stock  explained. 

Significance  attaching  to  the  guarantee  of  signa- 
tures by  brokers. 

Method  of  effecting  transfer  of  stock  by  corpora- 
tions. 

Replacement  of  new  for  lost  certificates. 

(With  reference  to  the  last  six  sub-heads 
of  this  topic  see  Chapter  on  "The  Transfer  of 
Securities",  Huebner:  "The  Stock  Market".) 


[51I 


TOPIC  XV 
CONVERSION  OF  SECURITIES 

At  a  recent  date  total  outstanding  issues 
of  listed  convertible  securities,  exclusive  of  do- 
mestic and  foreign  convertible  government 
bond  issues,  amounted  to  over  $1,500,000,000. 
Of  this  total  approximately  80%  consisted  of 
bonds  convertible  into  stock,  and  most  of  the 
balance  of  stocks  convertible  into  other  stocks. 
When  major  price  movements  occur  in  the 
market  the  conversion  privilege  often  assumes 
an  important  place  in  the  work  of  certain  classes 
of  dealers  in  the  security  market. 

Meaning  of  the  conversion  privilege. 

Rollins,  97-Q8  {In  Volume 
on  *' Stocks  and  the  Stock 
Market".) 

Various    conditions    governing    the    conversion 
privilege,  and  the  motives  prompting  their  adoption. 

Rollins  y  g8-ioi,  102-03, 
106-07,  108-10. 

Price  movement  of  convertible  securities  in  rela- 
tion to  one  another,  and  reason  therefor. 

Rollins,  loj. 

[52] 


Effect  which  the  conversion  privilege  sometimes 
has  upon  the  market  value  of  the  stock. 

Rollins,  I0I-I02. 

Method  of  reducing  current  quotations  of  bonds 
and  stocks,  into  which  they  are  convertible,  to  a 
common  basis. 

Rollins,  4,  6-y  {In  Volume 
on  ''Convertible  Securi- 
ties".) 

Accumulation  dividend  tables  and  their  use. 

Rollins,  i8-ig. 

Conversion  tables  and  their  use. 

Rollins,  6-7,  i8-ig. 

Method  of  adjusting  fractional  shares  which  can- 
not be  converted  evenly. 

Rollins,  io8-og. 
Rollins,  8-10. 

Price  relationship  between  convertible  issues 
where  the  conversion  privilege  becomes  effective 
at  some  future  time. 

Rollins,  104.-106. 

Rolli?is,  14-16. 

Method  of  treating  accrued  interest  and  dividends 
when  a  conversion  is  made. 

Rollins,  107-108. 

Arbitraging  in  convertibles  explained. 

Rollitis,  18-IQ. 

[53] 


Question  i.  What  effect  has  the  existe,nce  of  a 
convertible  bond  issue  upon  the  price  of  the 
stock  into  which  the  bond  may  be  con- 
verted ? 

Question  2.  Suppose  a  ^looo  bond  is  convertible 
into  stock  at  130.  Explain  (mathemat- 
ically) the  several  methods  of  adjusting 
the  fractional  shares.  Which  method  of 
adjustment  do  you  regard  as  the  most  de- 
sirable, and  why? 

Question  5.  What  considerations  would  you 
take  into  account  in  deciding  between  the 
desirability  of  purchasing  the  convertible 
bond  or  the  stock  at  prevailing  quotations, 
where  the  right  to  exchange  the  bond  into 
a  Stock  becomes  operative,  say,  10  years 
from  date  ?  Assume  that  the  current  quota- 
tions clearly  reflect  a  conversion  value  in 
the  bond  over  and  above  a  mere  investment 
worth. 

Question  4.  Union  Pacific  4%  convertible  bonds, 
due  in  1927,  are  convertible  at  par  into 
common  stock  at  175.  State  all  the  cir- 
cumstances under  which  it  will  prove 
profitable  to  exercise  the  conversion  priv- 
ilege. 

Assume  Union  Pacific  stock  to  be  quoted 
on  April  8  at  155H,  and  that  the  pre- 
ceding dividend  date  was  April  i.  Tak- 
ing the  bond  referred  to  in  the  above  para- 
graph, show  the  manner  of  computing  the 
conversion  equivalent  of  the  bond. 

[54] 


With  the  bond  quoted  at  102.93,  show 
the  manner  of  computing  the  stock  equiva- 
lent. 

Question  5.  Suppose  that  on  April  8,  with 
the  stock  selling  at  ISSH*  the  bond  was 
selling  at  3^  below  its  conversion  equiva- 
lent. Show  (mathematically)  how  an  ar- 
bitrage transaction  between  the  two  se- 
curities is  consummated.  Need  an  arbi- 
trageur actually  effect  a  conversion? 


tssl 


TOPIC  XVI 

MARKETING    OF     PRIVILEGED     SUB- 
SCRIPTIONS, OR  "RIGHTS" 

Meaning  of  "rights"  on  different  Stock  Exchanges. 

BurgundeTy  7^. 
Mite  he  II J  241-42. 

Extent  to  which  rights  have  been  issued  by  lead- 
ing American  corporations. 

BurgundeTy  73-74,  78,  87- 
g6. 

Determination  of  the  mathematical  value  of  rights. 

BurgundeTy  76-77. 
Lyon  II y  23-24. 

Meaning  of   "rights   on"   and   "ex-rights"   ex- 
plamed.  BurgundeTy  74. 

Lyon  II,  27. 

Stock    Exchange    regulations    concerning    "ex- 
rights"  and  commissions. 

Constitution  of  the  New 
York  Stock  Exchangey  Ar- 
ticle XXXIIy  Sec.  2; 
XXXIVy  Sec.  2.  (c). 

[56] 


Plans  of  issuance  followed  by  various  corpora- 
tions. _  ,  „ 

Burgunder^  74-7Si  o^. 

Mitchell,  2^9-40. 

Methods  which  stockholders  may  employ  in  dis- 
posing of  their  rights,  and  the  respective  advantages 
and  disadvantages  of  each  method. 

(In  addition  to  the  following  methods  it 
may  be  added  that  rights  are  nearly  always 
discounted  in  the  market.  Accordingly  the 
stockholder  may,  if  he  is  willing  to  part  with 
his  original  investment,  sell  the  same  when  the 
rights  are  announced,  the  price  including  the 
value  of  the  right) : 

May  sell  his  rights  since  a  market  for  them 
is  made  as  soon  as  the  corporation  announces 
the  allotment. 

Mitchell,  240-42,  243-44. 

Lyon  II,  24. 

May  sell  an  amount  of  his  original  holdings 
equal  to  the  number  of  new  shares  to  which  he 
is  entitled,  replacing  the  shares  sold  with  the 
new  stock  when  issued. 

Mitchell,  238-40,  243-44. 

May  subscribe  to  his  allotment  of  new 
shares,  selling  the  same  when  issued  by  the 
corporation. 

Mitchell,  236. 

May  sell  "short"  an  amount  of  stock  equal 
to  the  allotment,  borrow  to  fulfil  delivery  on 

I  57] 


the  short  sale,  and  return  the  stock  borrowed 
when  the  new  shares  are  issued. 

Mitchell,  236-J8. 

Extent  and  method  of  arriving  at  the  profit  where 
successive  offerings  of  stock  have  been  taken  and 
added  to  the  original  holdings. 

Burgunder,   75-76,   77-85, 

87-96. 

Mitchell,  245-58. 

Arbitraging  in  rights. 

Burgunder,  77. 
Lyon  II,  27-29. 
Nelson,  60-63. 

(With  reference  to  this  Topic  see  Chapter 
on  *' Privileged  Subscriptions",  Huebner:  "The 
Stock  Market".) 

Question  i.  Discuss  the  various  methods  which 
a  stockholder  may  adopt  in  disposing  of 
his  rights,  explaining  in  connection  with 
each: 

(i)  the  procedure  followed. 

(2)  the  advantages  of  the  plan. 

(3)  the  disadvantages  of  the  plan. 

(4)  The  relative  value  of  the  plan  judged 
from  the  standpoint  of  financial  return  to 
the  stockholder. 

Question  2.  The  Penna.  R.  R.  Co.  gave  its 
stockholders  the  privilege  of  subscribing 
to  new  stock  at  par  ($50)  to  the  extent  of 

[58]" 


10%  of  their  holdings.  At  the  time  of  the 
announcement  of  the  privilege,  the  stock 
sold  at  S7H-  Explain  the  mathematical 
computation  of  the  value  of  the  right  in 
New  York.  What  would  be  the  equivalent 
quotation  for  this  right  in  the  Philadelphia 
market?  Explain  the  reasons  for  the  dif- 
ference in  the  quotation  prevailing  in  the 
two  markets. 

Question  j.  With  Penna  R.  R.  stock  selling  at 
57^,  explain  mathematically  the  procedure 
by  which  an  arbitrageur  effects  a  profitable 
arbitrage  transaction  between  the  "stock" 
and  the  "rights",  and  outline  the  services 
which  such  an  arbitrageur  renders.  Also 
explain  the  considerations  which  the  pur- 
chaser of  rights  should  take  into  account 
in  determining  the  market  price  that  may 
be  paid  for  rights. 


[59] 


TOPIC  XVII 
CURB  AND  AUCTION  MARKETS 

Relation  of  the  New  York  Stock  Exchange  to  the 
New  York  Curb  Market. 

Van  Antwerp,  ^jj,  ^jj. 
Huehner,  21-2^. 
Pratt,  igg-200. 
Constitution    of   the    New 
York  Curb  Market,  11. 
New    York    Curb  Market 
Manual,  75. 

Functions  of  the  Curb  Market. 

Van  Antwerp,  4^2,  ^55. 
Pratt,  igg-200. 

Organization  of  the  New  York  Curb  Market. 

Constitution    of   the    New 
York  Curb  Market. 
Pratt,  200-201. 

Disciplinary  control  over  members. 

Constitution    of  the    New 
York  Curb  Market,  il. 

[60] 


Types  of  orders  and  contracts. 

New    York    Curb    Market 
Manual^  16-18. 

Regulations  concerning  deliveries. 

New  York  Curb  Market 
Ma7iualy  18-21. 

Comparison  of  transactions. 

New  York  Curb  Market 
Manual,  22-25. 

Listing  requirements. 

New  York  Curb  Market 
Manual,  25-27. 

Transfer  of  curb  securities. 

New  York  Curb  Market 
Manual,  28-J2. 

Cbmmissions  charged. 

New  York  Curb  Market 
Manual,  38. 

Security  Auction  markets. 

Huebner:  Chapter  on 
"Curb  and  Auction  Mar- 
kets" in ''The  Stock  Mar- 
ket". 


16.1 


DIVISION  III 

FACTORS  AFFECTING  SECURITY 
PRICES  AND  VALUES 


TOPIC  XVIII 

FACTORS     AFFECTING    THE     PRICES 
AND  VALUE  OF  SECURITIES 

INTRINSIC  EARNING  POWER 

Distinction  between  market  prices  and  intrinsic 

values. 

Pratt,  92-g7,  98. 

Stock  markets  are  essentially  markets  for 
"incomes",  i.e.,  in  the  long  run  prices  are  con- 
trolled by  values.  The  general  trend  of  prices 
is  governed  primarily  by  prospective  funda- 
mental values.  In  the  long  run,  despite  the 
ceaseless  backing  and  filling  of  price  movements, 
"prices"  and  "values"  tend  approximately  to 

coincide. 

Pratt,  96-103. 

Comparative    and   fundamental    statistics   con- 
trasted. 

The  physical  condition  and  the  earning 
power  of  a  corporation  are  indicated  by  the 
reports  of  the  corporations  under  consideration. 
The  data  contained  in  these  reports  should  be 
classified   as  "comparative  statistics".    These 

[  65  ] 


statistics  relate  to  the  present  and  past  record 
of  individual  properties,  and  guide  the  investor 
or  speculator  in  determining  the  approximate 
safety  of  an  investment,  or  in  the  making  of  a 
selection  between  several  investments.  They 
should  be  distinguished  from  so-called  "funda- 
mental statistics"  which  refer  to  the  present 
and  prospective  business  situation  in  general, 
as  reflected  by  certain  well-known  barometers, 
which,  while  showing  the  trend  of  the  present, 
serve  principally  as  a  guide  for  the  future. 

Babson,  Chapter  /,  J5-29. 
Melvin  T.  Copeland,  Sta- 
tistical Indices  of  Business 
Conditions,  pp.  1-41. 
Quarterly  Journal  of  Eco- 
nomics,  Vol.  XXIX,  May, 

1915- 

Analysis  of  comparative  statistics. 

The  value  of  both  bonds  and  stocks,  al- 
though representing  entirely  distinct  classes  of 
equities,  must  be  ascertained  along  much  the 
same  methods  of  analysis.  The  important 
question  is  that  of  permanency,  or  "the  result 
of  the  decade"  which  averages  a  showing  for 
both  poor  and  prosperous  years.  A  good  report 
contains  detailed  information  along  three  dis- 
tinct lines,  viz.,  the  physical  characteristics,  an 
income  account,  and  a  balance  sheet  dealing 
with  financial  characteristics.  Each  part  is 
essential  and  all  bear  an  intimate  relationship 

[66] 


to  one  another.  In  analyzing  these  three  parts, 
it  is  essential  (i)  not  to  judge  a  property  on 
the  basis  of  one  year's  showing,  and  (2)  to  bear 
in  mind  that,  since  all  things  are  relative,  com- 
parisons must  be  made  on  the  basis  of  certain 

fixed  standards. 

Moody,  ''Ho-cv  to  Analyze 
Railroad  Reports'', 


{^7] 


TOPIC  XIX 

FACTORS  AFFECTING  THE  PRICE  AND 
VALUE  OF  SECURITIES   (CONT.) 

THE  MONEY  MARKET  IN  ITS   RELA- 
TION TO  SECURITY  PRICES 

Relations  between  the  stock  and  money  markets : 

Various  uses  which  stock  brokers,  syndi- 
cates, investment  houses  and  banks  make  of 
securities  in  the  credit  market. 

Pratt,  266-67,  2Sg-go. 
■    Manner  of  financing  margin  transactions. 

Pratt,  267-68. 

Overcertification  of  broker's  checks. 

Pratt,  268-73. 

Van  Antwerp,  llJ-14. 

Nature  and  method  of  handhng  broker's 
call  loans.  p^^^^^  ^^^_^^^ 

Explanation  of  the  New  York  Clearing  House 
Bank  Statement.  Uuehner:  Chapter  on  "  Re^ 

lation  of  the  Stock  Market 
and  the  Money  Market'^  in 
''The  Stock  Market". 

[68] 


Value  of  the  New  York  Bank  Statement  as  a 
barometer  of  credit  conditions. 

Babson,  2g'/-g8. 
Huebner:  (above  chapter). 

Significance  of  the  "loan",  "cash",  "deposit"  and 
"surplus  reserve"  items  of  the  Bank  Statement, 
and  the  interpretation  of  their  movements  under 
various  circumstances: 

Ratio  of  "loans"  and  "loans  and  invest- 
ments" to  bank  resources. 

Babson,  2/O-yg. 
Huebner:  {above  chapter). 

Ratio  of  "cash"  to  "deposits"  and  to  re- 
sources. 

Babson,  280-88. 
Huebner:  {above  chapter). 

Interpretation  of  the  showing  of  "surplus 
reserves"  under  various  conditions. 

Babson,  288-g4. 
Huebner:  {above  chapter). 

Various  Bank  Statements — "summarized",  "ac- 
tual", "average"  and  "detailed" — described. 

Huebner:  {above  chapter). 


I69] 


TOPIC  XX 

FACTORS  AFFECTING  THE  PRICE  AND 
VALUE    OF     SECURITIES    (CONT.) 

PANICS  AND  BUSINESS  DEPRESSIONS 

INCLUDING  AN  EXPLANATION 

OF  BAROMETRIC  INDICES 

OF  TRADE 

The  cause  and  psychology  of  panics  and  depres- 
sions. 

Though  secondary  causes  may  contribute 
to  make  economic  crises  more  severe,  or  to 
shorten  or  prolong  their  duration,  the  under- 
lying cause  is  over-speculation  and  through  this 
the  over-extension  of  credit. 

Jones,  Chapter  Vllly  153- 
yg;  Chapter  IXy  180- 
217, 

Periodicity  of  crises. 

Jones,  Chapter  VII,  131- 

Importance  of  the  "factor  of  safety",  with  par- 

[70] 


ticular  reference  to  the  position  of  low-dividend  or 
non-dividend  stocks  during  periods  of  industrial  or 
financial  stress. 

Gibson,  *' Cycles  of  Specu- 
latiouy"  1 14.-1"/. 

Barometric  indices  of  trade  —  their  signifi- 
cance, and  the  sources  from  which  they  are  de- 
rived. 

The  aforementioned  bibliography  empha- 
sizes the  fact  that,  under  modern  credit  sys- 
tems, distinct  cycles  of  trade  occur  at  more  or 
less  irregular  intervals,  and,  roughly  speaking, 
each  of  these  cycles  contains  a  period  of  de- 
pression, a  period  of  improvement,  a  period  of 
prosperity  and  great  speculation,  and  a  period 
of  decline,  ending  again  v^ith  a  period  of  de- 
pression. The  approximate  determination  of 
v^hich  of  the  above-mentioned  periods  in  the 
cycle  the  country  is  experiencing  is  necessarily 
a  statistical  one.  For  this  purpose  various 
groups  of  statistics  (so-called  "barometers"  or 
"indices"  of  trade)  are  commonly  consulted 
and  periodically  published  in  the  leading  finan- 
cial journals.  Whatever  may  be  thought  of  the 
value  of  this  data  from  the  standpoint  of  fore- 
casting future  conditions  (a  matter  which 
vitally  affects  stock  market  prices,  since  the 
stock  market  is  essentially  a  discounting  agency) 
there  can  be  no  question  that  a  correct  compila- 
tion of  the  data  furnishes  a  fairly  accurate 
view  of  the  condition  of  trade  for  the  time 
being,  and  furnishes  the  basis  upon  which  se- 

[71] 


curity  owners  may  exercise  their  judgment  as 

to  the  future. 

BahsoUy  Chapter  I. 
James  H.  Brookfnire, 
''Methods  of  Business 
Forecasting  Based  on  Fun- 
damental  Statistics ",  pp. 
43-j8,  American  Economic 
Review,  March,  IQ13,  Vol. 
Ill,  No.  I. 

Melvin  T.  Copeland,  Sta- 
tistical Indices  of  Business 
Conditions,  pp.  1-41. 
Quarterly  Journal  of  Eco- 
nomics, Vol.  XXIX,  May, 

1915- 


[72] 


TOPIC  XXI 

FACTORS  AFFECTING  THE  PRICE  AND 
VALUE    OF    SECURITIES     (CONT.) 

VARIOUS  TYPES  OF  MANIPULATION 

Fraudulent  methods  of  manipulation. — (These 
have  assumed  three  main  forms,  namely:  (i) 
fraudulent  management  of  properties  and  the 
issuance  of  fraudulent  or  deceptive  reports  and 
news  items;  (2)  selling  securities  through  im- 
properly spread  "tips"  or  "news";  and  (3) 
"wash  sales"  and  "matched  orders".) 

Pratt,  364-65,  386-87I 

Manipulative  campaigns  planned  with  reference 
to  future  conditions,  and  involving  skilful  manage- 
ment in  the  art  of  accumulating  or  distributing  lines 
of  stock  to  the  best  advantage  of  the  manipulator. 

Pratt,  364,  365-68. 
Bond,  77-85. 

Comers. — (These  have  at  times  caused  tre- 
mendous upheavals  in  the  security  market  and 
become  possible  only  because  of  the  existence 
of  a  short  interest  in  the  market.  A  corner 
is  brough  about  by  an  operator  or  pool  obtain- 

[73] 


ing  virtual  possession  of  the  shares  available 
for  delivery  in  fulfilment  of  short  sales.  Such 
sales  are  first  induced  on  a  large  scale  by  ap- 
parently high  prices  or  other  methods,  the  short 
seller  depending  upon  a  continuous  market  for 
the  purchase  of  stock  for  purposes  of  delivery. 
When  the  time  to  deliver  arrives,  the  short  inter- 
est finds  that  none  is  available,  either  for  buying 
or  borrowing  purposes.  The  operator  (or  pool) 
has  obtained  possession  of  practically  all  the  stock 
called  for  by  the  contracts  made  by  the  shorts. 
The  only  means  of  escape  is  to  settle  at  a  price 
determined  by  the  operator,  or  to  repudiate  the 
contracts.  While  repudiation  is  permitted  by 
law,  such  practice  has  not  been  countenanced 
by  the  rules  of  stock  exchanges.  In  the  case 
of  various  produce  markets,  however,  rules 
have  been  adopted  which  provide  that  in  case 
of  a  corner  a  reasonable  settlement  price  can 
be  established  by  a  properly  constituted  com- 
mittee, thus  protecting  the  short  interest  against 
the  arbitrary  whim  of  the  manipulator.  Such 
rules,  it  is  believed,  will  remove  the  incentive 
for  operating  a  corner,  since  the  decision  of  the 
committee  will  have  in  view  the  establishment 
of  a  fair  settlement  price.) 

Pratt,  368-70,  387-88. 

Illegality  of  comers. 

Samuels  vs.  Oliver,  130  III. 

73- 

"Technical  condition"  of  the  market.     (Refer- 
ence is   constantly  made  in  the  press  to  the 

[74] 


"over-bought"  or  "over-sold"  condition  of  the 
market.  By  these  terms  it  is  meant  that 
there  has  been,  in  view  of  the  normal  supply 
and  demand  of  a  given  security,  an  unusually 
large  amount  of  buying  on  margin  or  an  un- 
usually large  amount  of  short  selling.  If  this 
over-bought  or  over-sold  condition  is  dis- 
covered, the  opposing  interest  in  the  market 
may  seek  to  compel  a  decline,  or  to  compel  the 
short  interest  to  cover.  Such  a  situation,  known 
as  the  technical  condition  of  the  market,  is 
rendered  worse  at  times  by  the  existence  of  (i) 
pyramiding  and  (2)  an  unusually  large  number 
of  stop-loss  orders.) 

Bondy  68-76. 


[75] 


TOPIC  XXII 

FACTORS  AFFECTING  THE  PRICE  AND 
VALUE    OF    SECURITIES    (CONT.) 

INCREASING  GOLD  SUPPLY  AND  RAP- 
IDLY RISING  COMMODITY  PRICES 
AND  THEIR  RELATION  TO 
SECURITY  PRICES 

Causes  producing  rising  commodity  prices.  With 
two  main  exceptions,  the  price  factors,  out- 
Hned  in  these  topics,  are  either  temporary 
in  their  operation  or  can  only  be  considered 
in  their  relation  to  individual  properties. 
These  two  exceptions  are  the  intrinsic  earning 
power  of  corporations  and  increasing  commod- 
ity prices.  These  two  basic  causes  affect 
security  prices  in  general  over  long  periods  of 
time  and  without  much  regard  to  locality.) 

Chamberlain,  4Q2-^I2. 
Gibson,  s-ig,  73-94. 

Effect  on  interest  rates  and  on  bonds,  which,  while 
possessing  the  advantage  of  certainty,  have  the 
disadvantage  of  a  definitely  limited  income. 

Chamberlain,  492-^12. 
Gibson,  15-16,  79-8$. 

[76] 


Effect  upon  preferred  stocks  having  a  fixed  rate 
of  income. 

Gihsoriy  79-8 5. 

Effect  upon  the  common  stocks  of  railroads  and 
most  public  service  corporations. 

Gibson,  17-ig,  85-88. 

Effect  upon  the  stocks  of  industrial  corporations. 

Gibson,  88-89. 


[77] 


TOPIC  XXIII 

FACTORS  AFFECTING  THE  PRICE  AND 
VALUE  OF  SECURITIES  (CONT.) 

CROP  PROSPECTS  AND  THEIR  RELA- 
TION TO  SECURITY  PRICES 

Of  the  numerous  current  happenings  which 
have  a  vital  bearing  on  security  prices,  few 
approximate  in  importance  the  annual  condi- 
tion of  the  nation's  agricultural  crops.  The 
value  of  these  crops  aggregates  annually  be- 
tween eight  and  nine  billions  of  dollars.  This 
huge  mass  of  new  wealth,  besides  furnishing 
directly  a  very  large  share  of  the  high  revenue 
producing  tonnage  of  the  nation's  railroads, 
also  vitally  affects  numerous  other  leading 
industries  whose  securities  are  listed  on  ex- 
changes. While  mining  and  forestry  products 
are  important,  they  are  fairly  regular  and  are 
subject  to  control  in  accordance  with  the  de- 
mands of  business  requirements.  The  products 
of  the  soil,  however,  are  mainly  dependent  on 
climatic  conditions  and  their  output  is  there- 
fore uncertain  to  an  unusual  degree.  The  an- 
nual yield  of  leading  staples,  such  as  wheat, 

[  78  ] 


corn  and  cotton,  frequently  vary  from  ten  to 
thirty  per  cent,  as  compared  with  the  preceding 
year.  Fluctuations  in  these  crops  may  also  be 
much  greater  in  one  section  of  the  country  than 
another,  thus  vitally  affecting  corporations  in 
those  localities. 

Intimate  relationship  between  crop  prospects  and 
the  movement  of  stock  prices. 

Gibson,  "Elements  of  Spec- 
ulation", 11-13,  35-43- 

Government  crop  reporting  system.  (Were  it 
not  for  some  fairly  accurate  and  unbiased  sys- 
tem of  crop  reporting,  first-hand  information 
would  be  limited  to  a  very  few.  The  aver- 
age person  would  be  at  the  mercy  of  a  flood 
of  rumors  and  manipulation  would  exist  on  a 
scale  infinitely  greater  than  at  present.  For 
these  reasons,  as  well  as  because  of  the  fun- 
damental importance  of  the  subject  from  a 
business  standpoint,  it  is  highly  important  to 
have  the  Government  issue  reports  periodically 
which  represent  about  95  per  cent,  of  the  acre- 
age and  80  per  cent,  of  the  total  of  the  nation's 
agricultural  output) : 

Economic   functions   resulting   from   such 
reports. 

Murray,  go,  pp. 

Sources  of  the  data  used,  and  method  of 
preparing  and  disseminating  the  reports. 

Murray,  91-94,  96-99. 
[79] 


Method  of  interpreting  "condition"  figures 
in  order  to  arrive  at  the  total  yield. 

Murray,^g4-95. 
Gibson,  "  Elements  of  Spec- 
ulation", ly-ig. 

Private  sources  of  current  information  on  crop 
prospects. 

Mudgetty  io4j  iig. 


[8c] 


DIVISION  IV 

LEGAL  PRINCIPLES  GOVERNING  THE 
STOCK  EXCHANGE  BUSINESS 


TOPIC  XXIV 

LEGAL  PRINCIPLES  AND  USAGES  RELA- 
TING TO  THE  EXECUTION  OF  OR- 
DERS AND  THE  CARRYING  OF 
AN  ACCOUNT 

In  addition  to  the  principles  enumerated  in  Topic 
X,  the  following  duties  of  the  broker  in  connection 
with  the  execution  of  orders  and  the  carrying  of  ac- 
counts, deserve  special  study: 

No  secret  profits  may  be  made  by  the 
broker  out  of  the  transaction. 

Dos  Passos  I,  2i8-ig. 

The  customer  must  be  given  full  notifica- 
tion of  every  transaction.  This  is  also  a  stat- 
utory requirement  at  present. 

Dos  Passos  /,  21J-14. 

Brokers  are  bound  by  the  acts  of  their 
managers  although  there  may  be  a  violation 
of  some  private  instruction  unknown  to  the 
customer.  Dos  Passos  I,  214-18. 

Failure  to  carry  out  a  definite  order  ren- 
ders the  broker  liable  for  any  consequent  loss. 

Dos  Passos  I,  206-08. 

[83] 


An  order  to  purchase  is  not  an  entire  con- 
tract, the  broker  being  enabled  to  buy  or  sell 
a  smaller  quantity  than  is  ordered.  By  usage, 
however,  it  is  customary  not  to  split  into  odd 
lots  an  order  for  the  purchase  or  sale  of  a 
hundred  shares  or  multiples  thereof. 

Dos  Passos  I,  208-10. 

Proper  accounts  must  be  kept  by  a  broker, 
showing  the  names  of  the  persons  with  whom 
he  deals  for  his  customer;  and  failure  to  comply 
with  this  duty  legally  involves  a  presumption 
of  value  against  him. 

Dos  Passos  7,  218-ig. 

A  broker  is  legally  forbidden  to  buy  his 
customer's  stocks  or  to  sell  his  own  stocks  to 
the  customer,  except  by  consent,  i.e.,  he  "can- 
not act  as  principal  and  agent  in  the  same 
transaction  without  his  customer's  consent". 

Dos  Passos  7,  ^6^-82. 

Usages  in  the  stock  brokerage  business. 

Dos  Passos  7,  pp.  410-66. 

The  principal  propositions,  relative  to  the 
doctrine  of  usage  in  the  stock  brokerage  busi- 
ness, as  outlined  by  Dos  Passos,  are: 

(i)  "The  usage  of  the  business  is  never 
permitted  to  make  an  entire  or  new  contract 
for  the  parties".  The  purpose  of  a  usage  is  to 
supply  deficiencies  and  omissions. 

(2)  The  interpretation  of  technical  words 
and  phrases  (and  there  are  few  businesses  in 

[84I 


which  peculiar  terminology  is  so  abundant) 
depends  upon  the  usage  of  the  business.  The 
broker  is  protected  if  the  usage,  as  understood 
by  the  trade,  has  been  complied  with.  Written 
and  express  contracts,  however,  cannot  be 
varied  by  usage. 

(3)  Usages  cannot  be  opposed  to  fixed 
rules  of  law,  may  not  be  opposed  to  public 
policy,  and  may  not  be  unreasonable.  If, 
however,  a  usage  does  not  conflict  with  the 
aforementioned  three  principles  it  is  perniissible 
as  forming  a  part  of  the  contract  and  is  pre- 
sumed to  enter  into  the  intention  of  the  con- 
tracting parties. 

(4)  When  employing  a  broker,  a  customer 
may  presume  that  he  has  been  employed  with 
reference  to  "the  customs  of  brokers".  The 
stock  broker,  hkewise,  may  presume  implied 
authority  to  observe  all  the  rules  and  usages  of 
the  exchange  of  which  he  is  a  member.  The 
courts  have  gone  so  far  as  to  read  into  the 
order,  even  if  given  in  the  form  of  a  telegraphic 
message,  the  entire  constitution  and  by-laws 
of  the  exchange  of  which  the  employed  broker 
is  a  member. 

(5)  The  usages  of  a  particular  brokerage 
firm  may  be  introduced  to  interpret  a  contract 
when  they  are  known  to  the  party  whom  it  is 
sought  to  charge  with  the  same.  But  a  broker 
cannot  legally  bind  his  client  to  such  particular 
usages,  which  do  not  follow  the  ordinary  and 
customary  method,  unless  there  is  an  express 
agreement  covering  the  usage. 

[85] 


(6)  The  usual  obligations  of  a  broker  may 
be  changed  and  controlled  by  special  agree- 
ments with  his  client,  i.e.,  special  contracts  may 
be  entered  into,  limiting  the  liability  of  the 
parties  in  any  respect.  Thus  joint  adventures 
m  stocks  (for  speculation  on  joint  account) 
may  be  entered  into. 

Dos  Pas  SOS  /,  Chap.  IF. 

When  a  broker  may  close  a  transaction: 

In  the  absence  of  an  express  agreement  to 
the  contrary,  the  broker  may,  upon  reasonable 
notice,  require  his  client  to  take  securities  car- 
ried for  him  and  thus  close  the  transaction. 
This  principle  is  held  by  virtue  of  the  fact 
that  the  client  has  a  reciprocal  right  to  close 
an  account.  Moreover,  the  courts  hold  that  the 
commission  is  earned  by  making  the  transac- 
tion. 

Dos  Passos  /,  385-86. 

The  client's  securities  may  be  sold  in  case 
of  his  bankruptcy,  and  it  is  the  duty  of  the 
broker  to  take  notice  of  the  fact  of  bankruptcy. 

Dos  Passos  /,  386-87. 

The  broker  is  justified  in  closing  an  ac- 
count in  case  of  the  death  of  his  client.  In 
New  York,  however,  the  broker,  if  acting  in 
good  faith,  may  continue  the  account  until  the 
appointment  of  a  legal  representative. 

Dos  Passos  /,  387-88. 

[861 


Where  demand  for  sufficient  niargin  is  not 

complied   with,    and   where   the   right   to   sell 

without  notice  at  either  public  or  private  sale 

has  been  reserved. 

Markham  vs.  JaudoUy  41 

N.  Y.  235, 

Brokers'  communications  are  not  privileged. 

Dos  Passos  /,  400-04. 


[87] 


TOPIC  XXV 

RIGHTS  AND  DUTIES  OF  BROKER  TO 

CLIENT  AS  (i)  AGENT  AND  (2) 

PLEDGEE 

Topic  XI  dealt  with  the  principles  govern- 
ing client  and  broker  in  a  speculative  transac- 
tion as  laid  down  by  the  widely  known  case  of 
Markham  vs.  Jaudon  {41  N.  Y.  2^5).  This 
case,  however,  is  concerned  only  with  the  gen- 
eral basic  principles  governing  pledgor  and 
pledgee  in  speculative  transactions  and  does 
not  take  cognizance  of  the  numerous  special 
problems  that  arise  in  such  transactions.  It 
is  the  purpose  of  this  topic  to  present  these 
special  problems. 

Degree  of  due  care  and  diligence  required  of  a 
broker  when  acting  as  agent  or  pledgee. 

Dos  Pas  SOS  /,  218-41. 
Isham  vs.  Post^  141  N.  Y. 
100. 

Leading  legal  principles  governing  the  disposition 
and  safe-keeping  of  stock  when  purchased  by  a 
broker : 

[88] 


Liability  in  case  of  loss  of  the  securities  by- 
theft,  or  otherwise. 

Dos  Pas  SOS  /,  241-42. 

Liability  of  remaining  partners  to  a  client 
whose  securities  are  misapplied  by  one  of  the 
partners — liability  for  wrongful  acts  of  clerks. 

Dos  Pas  SOS  /,  24^-44. 

Rights  of  the  broker  wuth  reference  to  the 
transfer  of  stock  purchased  for  a  customer  on 
margin. 

Dos  Passos  I,  241-46. 

Extent  of  a  broker's  right  to  vote  stock 
held  by  him  for  a  customer's  account. 

Dos  Passos  I,  24/-4g. 

Obligation  of  the  broker  at  all  times  to 
have  a  sufficient  quantity  of  stock  under  his 
control  to  dehver  to  his  cHent  upon  payment 
of  the  amount  due. 

Dos  Passos  /,  252-64. 

Rights  of  the  broker  with  reference  to 
dividends  or  assess-ments  in  connection  with 
stock  held  by  him  as  a  pledge. 

Dos  Passos  /,  264-75. 

A  broker's  right  to  repledge  stock  en  bloc. 

There  are  four  important  New  York  cases 
which  relate  to  the  legal  principles  governing 

[89] 


this  important  subject,  viz.,  Douglas  vs.  Car- 
penter, 17  App.  Div.  ^2Q  {iSgy);  Rothschild  vs. 
Allen,  go  App.  Div.  255  (1904),  affirmed  180 
N.  Y.  561 ;  Strickland  vs.  Magoun,  iig  App. 
Div.  113  (igoy);  and  Mayer  vs.  Monzo,  151  App. 
Div.  866  {igi2).  Of  these  cases  the  first  and 
particularly  the  last  are  the  most  important, 
because  they  represent  the  previous  and  present 
law  on  the  subject  in  New  York.  The  courts 
of  most  other  states  have  decreed  that  a  broker 
may  borrow  money  by  sub-pledging  margined 
stock  en  bloc.  In  New  York,  however,  until 
the  Mayer  vs.  Monzo  decision,  the  ruling  was 
otherwise,  i.e.,  to  the  effect  that  a  customer's 
margined  stock  could  not  be  commingled  with 
other  securities  by  the  broker  and  then  pledged 
en  bloc  for  a  larger  amount  than  the  customer's 
indebtedness  on  the  stock.  Such  commingling 
was  held  to  constitute  a  conversion.  This  con- 
clusion, as  stated,  was  reversed  in  the  important 
case  of  Mayer  vs.  Monzo.  A  study  of  this  case 
is  important  not  only  because  it  presents  the 
law  of  today  but  because  the  dissenting  opinion 
reviews  the  facts  and  conclusions  of  all  the 
preceding  cases. 

Mayer    vs.    Monzo,    151 
App.  Div.  866  {igi2). 

Liability  of  a  broker  when  cooperating  with  an  in- 
solvent broker. 

Austin    vs.    Hayden,    i^y 
N.  W.  317. 

[90] 


Measure  of  damages  in  case  of  error  or  conver- 
sion. 

Dos  Passes  Ily  Chapter 
Vllly  particularly  pages 
912-34. 

Joint  Adventures  in  Stocks. 

Dos  Passes  /,  313-23. 


[91I 


TOPIC  XXVI 

EXTENT   TO    WHICH    MARGINS    AND 
PLEDGED  SECURITIES  OF  CUSTOM- 
ERS ARE  PROTECTED— PRINCI- 
PLES GOVERNING  THE  IDEN- 
TIFICATION OF  SECURITIES 

The  customer's  right  to  pledged  securities  in 
case  of  the  broker's  insolvency: 

Where  a  customer's  stock  is  repledged  by 
the  pledgee,  the  customer  (the  owner)  can  re- 
cover from  the  sub-pledgee  only  after  payment 
of  the  first  pledgee's  full  debt. 

McNeil  vs.  Tenth  National 
Bank,  46  N.  Y.  32$. 

A  customer's  stock,  carried  by  a  broker, 
goes  to  the  customer  and  not  the  broker's  as- 
signee in  case  of  insolvency. 

Willard  vs.  White,  ^6  Hun 
581. 

Certain  customers  may  have  special  claims 
over  other  customers  because  of  special  circum- 
stances, such  as  payment  of  the  full  purchase 

[92] 


price  to  the  broker  for  an  outright  purchase, 
or  the  misappropriation  of  a  customer's  securi- 
ties by  a  broker  and  the  placing  of  the  proceeds 
of  the  unauthorized  sale  in  his  bank  account. 
In  the  latter  case  the  courts  follow  the  doctrine 
of  tracing  trust  funds. 

In  re  Mulligany  ii6  Fed. 

Garrard  Glen7i,  "Rights  of 
the  Customers  of  an  In- 
solvent Broker",  Columbia 
Law  RevieWy  May,  igi2y 
'pp.  422-4.2. 

If  a  broker  mingles  the  stock  of  different 
owners  and  hypothecates  the  same  en  bloc, 
some  rightfully  and  some  wrongfully,  customers 
whose  stock  is  wrongfully  hypothecated  have  a 
superior  equity  and  are  entitled  to  have  prior 
payment  of  their  losses,  provided  their  stock 
or  its  proceeds  can  be  traced. 

Matter  of  Mills ,  12 S  App. 
Div.  750. 

Identification  of  Securities.  (The  application 
of  the  aforementioned  principles  depends  upon 
the  ability  of  owners  of  securities  to  properly 
identify  the  same,  thus  frequently  giving  rise 
to  numerous  questions  as  to  the  marshalling 
of  securities  or  proceeds  between  the  cus- 
tomers.) 

Dos  Passes  /,  285-93- 

[93] 


BOOKS  REFERRED  TO  IN  THE  OUTLINE 
OF  A  COURSE  ON  STOCK  EX- 
CHANGE BUSINESS 

Adams — Stocks  and  Their  Features — Division  and 
Classification.  By  John  Adams,  Jr.,  1910, 
pp.  43-62.  Published  In  the  Volume  on 
"Stocks  and  the  Stock  Market",  Annals  of 
the  American  Academy  of  Political  and  So- 
cial Science,  Philadelphia,  $1.50. 

Bab  SON — Factors  Affecting  Commodity  Prices.  By 
Roger  W.  Babson,  191 1.  PubUshed  in  the 
Volume  on  "American  Produce  Exchange 
Markets",  Annals  of  the  American  Academy 
of  Political  and  Social  Science,  Philadelphia, 
$1.50. 

Business  Barometers  for  Anticipating  Con- 
ditions. By  Roger  W.  Babson,  191 7.  Tenth 
Edition.  Wellesley  Hills,  Mass.  Babson 
Statistical  Organization,  $2.00. 

Bond — Stock  Prices:  Factors  in  Their  Rise  and  Fall. 
By  Frederick  D.  Bond,  191 1.  Moody's  Mag- 
azine Book  Department,  New  York,  $1.00. 

Brookmire — Methods  of  Business  Forecasting  Based 
on  Fundamental  Statistics.  By  James  H. 
Brookmire,  191 3.  American  Economic  Re- 
view, Vol.  Ill,  No.  I,  pp.  43-58. 

[94] 


/ 


BuRGUNDER — The  Declaration  and  Yield  of  Stock- 
holders' Rights.  By  B.  B.  Burgunder,  1910. 
Published  in  the  Volume  on  "Stocks  and  the 
Stock  Market,"  Annals  of  the  American  Acad- 
emy of  Political  and  Social  Science,  Phila- 
delphia, $1.50. 

Chamberlain — The  Principles  of  Bond  Investment. 
By  Lawrence  Chamberlain,  191 1.  Henry 
Holt  &  Co.,  New  York,  $5.00  net. 

Constitution  of  the  New  York  Stock  Exchange. 

CoPELAND — Statistical  Indices  of  Business  Condi- 
tions. By  Melvin  T.  Copeland,  191 5,  Quar- 
terly Journal  of  Economics,  Vol.  XXIX, 
May,  1915,  pp.  1-41. 

Dos  Passos — A  Treatise  on  the  Law  of  Stock  Brokers 
and  Stock  Exchanges.  By  John  R.  Dos  Passos, 
1905.  The  Banks  Law  Publishing  Co.,  New 
York,  two  volumes,  $12.00. 

Emery — Speculation  on  the  Stock  and  Produce  Ex- 
changes of  the  United  States.  By  Henry  C. 
Emery,  1904.  The  Macmillan  Co.,  New 
York,  $2.00;  paper  $1.50. 

Gibson — The  Elements  of  Speculation.  By  Thomas 
Gibson,  1913.  Gibson  Publishing  Co.,  New 
York,  $1.00. 

The    Increasing    Gold    Supply.     By   Thomas 

Gibson,  Editor,  1908.    Gibson  PubUshing  Co., 
New  York. 

The    Cycles    of    Speculation.     By    Thomas 

Gibson,  1907.    The  Moody  Corporation,  New 
York,  ii.50. 

Glenn — Rights  of  the  Customers  of  an  Insolvent 
Broker.  By  Garrard  Glenn,  191 2.  Columbia 
Law  Review,  May,  191 2,  pp.  422-42. 

[95] 


Goldman — A  Handbook  of  Stock  Exchange  Laws. 
By  Samuel  P.  Goldman,  1914.  Doubleday, 
Page  &  Co.,  New  York. 

Hearings  before  the  Senate  Committee  on  Banking  and 
Currency  on  S.  3895^  6jd  Congress^  Second  Ses- 
sion. 1914.  Government  Printing  Office, 
Washington. 

HiGGiNS — The  Put-and-Call.  By  Leonard  R.  Hig- 
gins,  1906.  London,  Effingham  Wilson, 
Royal  Exchange. 

HuEBNER — The  Scope  and  Functions  of  the  Stock 
Market.  By  S.  S.  Huebner,  1910.  Published 
in  the  Volume  on  "Stocks  and  the  Stock 
Market",  Annals  of  the  American  Acaderny 
of  Political  and  Social  Science,  Philadelphia, 
$1.50. 

''The  Stock  Market,'*  a  text  now  in  course  of 

preparation. 

(Also  see  "Stocks  and  the  Stock  Market".) 

Jones — Economic  Crises.  By  Edward  D.  Jones, 
1900.    The  Macmillan  Co.,  New  York. 

Koch — German  Imperial  Banking  Laws,  together 
with  the  German  Stock  Exchange  Regulations. 
1910.  Edited  by  R,  Koch.  Government 
Printing  Office,  Washington.  Published  by 
the  National  Monetary  Commission,  6ist 
Congress,  2d  Session,  Sen.  Doc.  No.  574. 

Lyon — Corporation  Finance.  By  Hastings  Lyon. 
Complete  Edition,  1916.  Houghton  Mifflin 
Co.,  New  York.  Vols.  I  and  II  bound  to- 
gether, ^3.00. 

Mitchell — Stockholders'  Profits  from  Privileged  Sub- 
scriptions.     By    Thomas    Warner    Mitchell, 

[96] 


iQoq.    The  Quarterly  Journal  of  Economics, 
Cambridge,  Mass.,  Volume  XIX,  Feb.,  1905, 
pp.  231-269. 
UooDY-How  to  Analyze  Railroad  Reports.    By  John 
Moody,  191 2.    Analyses  Publishmg  Co.,  New 
York. 
Uv^GETT— Current  Sources  oj  Information  in  Produce 
Markets.    By  Bruce  D.  Mudgett,  191 1-    Pub- 
lished in  the  Volume  on  "American  Produce 
Exchange  Markets",  Annals  of  the  American 
Academy    of    Political    and    Social    Science, 
Philadelphia,  $1.50. 
Murray— r/j^  Crop  Reporting  System.    By  Nat  C. 
Murray,  191 1-     Pubhsfied  in  the  Volume  on 
"American    Produce    Exchange    Markets   , 
Annals  of  the  American  Academy  of  Political 
and  Social  Science,  Philadelphia,  $1.50. 
NELSON-n.  A.  B.  C.  oj  Options  and  Arbitrage. 

By  S.  A.  Nelson,  1904-  New  York,  75c. 
Norton— n^  Purchase  or  Sale  of  Securities  through 
^  a  Stock  Broker.  By  Eliot  Norton,  1910. 
Pubhshed  in  the  Volume  on  Stocks  and  the 
Stock  Market",  Annals  of  the  American 
Academy  of  Political  and  Social  Science, 
Philadelphia,  $1.50. 

Short    Sales    of    Securities    through    a    Stock 

Broker.  By  Eliot  Norton,  1907- 
PRATT-n.  Work  of  Wall  Street^  ^y  Sereno  S. 
Pratt,  1914.  D-  Appleton  &  Co.,  New  York, 
$2.00. 
^oi.i.ms-Convertihle  Bonds  and  Stocks  By  Mont- 
gomery  Rollins,  1910.  P,"bhshed  in  the  Vol- 
ume on   "Stocks   and   the   Stock  Market   , 

[97] 


Annals  of  the  American  Academy  of  Political 
and  Social  Science,  May,  1910,  pp.  97-110, 
Philadelphia,  $1.50. 

Convertible     Securities.        By     Montgomery 

Rollins,  1913.  Second  Edition.  Financial 
Publishing  Co.,  Boston,  $5.00  net.  (The 
introductory  Chapter  to  which  page  refer- 
ences refer  may  be  obtained  separately  for 
50c.  per  set.) 

Stocks  and  the  Stock  Market.  Edited  by  S.  S.  Hueb- 
ner,  1910.  Annals  of  the  American  Academy 
of  Political  and  Social  Science,  Philadelphia, 
$1.50. 

ToDMAN — Brokerage  Accounts.  By  Frederick  S. 
Todman,  1916.  Ronald  Press  Co.,  New 
York,  $3.50. 

Van  Antwerp — The  Stock  Exchange  from  Within. 
By  Wm.  C.  Van  Antwerp,  1914.  Doubleday, 
Page  &  Co.,  New  York. 

ViDAL — The  History  and  Methods  of  the  Paris  Bourse. 
By  E.  Vidal,  1910.  Government  Printing 
Office,  Washington.  Published  by  the  Na- 
tional Monetary  Commission,  61  st  Cong., 
2d  Session,  S.  Doc.  No.  573. 

S/     Withers — Stocks  and  Shares.    By  Hartley  Withers, 
1 910.    E.  P.  Dutton  &  Co.,  New  York,  $2.00. 


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